Goods and services tax is a new form of taxation that has been planned to be adopted by the government of India. It is expected to be applied from 1st July 2017. In this kind of tax reform, many of the taxes will merge and form a single tax known as GST. It is an indirect tax on manufacture, sale, and consumption of goods and services throughout India to replace taxes levied by the central and state governments. The introduction of Goods and Services Tax is significant towards the reform of indirect taxation in India.
How will GST work in India?
Goods and Services Tax (GST) is the integrated indirect tax which is levied on the supply of Goods and Services. There will be dual GST with the Center and State simultaneously levying it on the common tax base. The CGST and SGST will be charged on intra-state supplies whereas IGST will be charged on inter-state supplies. The small business having turnover up to Rs. 20 Lakhs are exempted from GST under. All the other taxpayer having the turnover of more than Rs. 20 Lakhs (Rs 10 Lakhs in northeast States) are required to register and pay GST.
Effects of GST-
The central government has assured states to provide them with compensation for any revenue losses incurred by them from the date of introduction of GST for a period of five years. It has been proposed to insulate the revenues of the states from the impact of GST, with the expectation that in due course, it will be levied on petroleum and petroleum products. The tax rate prescribed may be nominal or zero rated for the time it will be charged.
1. The introduction of GST as a single indirect tax will impact the tax credit mechanism positively. This would definitely benefit the ultimate consumer. This is because most of the prevailing indirect taxes possess tax on tax incidence, thus resulting in rapidly increased price. By allowing the dealer or manufacturer or retailer to claim input tax credit, GST will be bringing down the unnecessary tax addition to the value addition.
2. GST is expected to bring in more tax revenue, being disincentive tax structure. Bringing in tax credit mechanism means the dealer/ manufacturer or retailer would be able to claim input tax credit, only if he pays or assumes to pay the tax liability. This would curb tax evasion to a great extent.
3. GST is introduced to bring in all those black market transactions, because now the sellers will only deal with those who are registered under GST (to avail input tax credit).
4. Currently, we have very complex and multifaceted indirect tax structure. GST being a single tax regime, will result in much lower tax rate (considering currently we are paying higher indirect taxes due to tax on tax scenario, even if each tax has a lower rate). This will benefit the seller (by way of availing tax credit at each value addition) and the ultimate consumer (by way of reduced incidence of tax).
Advantages of GST
There is no doubt that in production and distribution of goods, services are increasingly used or consumed and vice versa. The present taxation system which has separate taxes on every product, requires the division of transaction values into a value of goods and services for taxation, leading to greater complications, administration, including compliances costs. In the GST system, when all the taxes are integrated, it would make possible the taxation burden to be split equitably between manufacturing and services. GST will be levied only at the final destination of consumption based on (Value Added Tax) VAT principle and not at various points (from manufacturing to retail outlets). This will help in removing economic distortions and bring about the development of a common national market.
Status of implementation of GST
To be fully applicable by the law in all the States, the GST Bill needs to be passed by a two-thirds majority in both Houses of Parliament and by the legislatures of half of the 29 States. In December 2014, Finance Minister Arun Jaitley introduced the constitutional amendment Bill for the GST in the Lok Sabha. He announced that GST would be a major reform in India’s taxation system since 1947, which would reduce transaction costs for business and boost the economic growth. The finance minister while introducing the Bill said clearly that all efforts have been taken to make sure that the States do not suffer any loss of revenue with the implementation of the GST, if they do so they will be compensated by the center. The States will receive Rs 11,000 crore this fiscal year so that it would compensate the losses suffered by them for the decline in Central sales tax (CST) and subsequently financial assistance would be provided for a five-year period. The bill which was conceived way back in the year 2000 was not passed in all these years. Everything went well, most likely the Bill was legislated by April 2016. According to a study by the National Council of Applied Economic Research (NCAER), only the full implementation of the GST would expand India’s growth of the gross domestic product. By removing the system of multiple Central and State taxes, this tax can help in reducing taxation and filing costs and expand business profitability, thereby attracting investments and promoting GDP growth. Simplification of tax norms can help in improving tax compliance and increasing tax revenue
1. Ensuring availability of input credit chain
2. Minimizing cascading effect of taxation
3. Simplification of tax administration and compliance
4. Harmonization of tax base, laws, and administration procedures across the country
5. Minimizing tax rate slabs to avoid classification issues
6. Prevention of unhealthy competition among Indian states
7. Increasing the tax base and raising the compliance
1. Lack of adaptation
2. Lack of trained staff
3. Double registration can increase compliances and cost as well
4. Lack of clear mechanism to control tax evasion
5. Hard to estimate the exact impact
Disadvantages of GST
1. Higher Tax Burden for Manufacturing SMEs:
Small businesses in the manufacturing sector will bear most of the brunt of GST implementation. Under the existing excise laws, only manufacturing business with a turnover of more than Rs.1.50 crores have to pay excise duty under all circumstances.
2. Increase in Operating Costs:
Most small businesses do not employ professionals and prefer to pay taxes and file returns on their own to save costs.
3. GST Will be implemented during the Middle of the Year:
This is to make a general note that GST is going to be implemented form 1st July 2017 and this implementation will create a problem at the end of the financial year.
4. Petroleum Products Are Not Part of GST Yet:
Petroleum products are being kept outside its purview as of now as it does not have the predictable scope. States will levy their own taxes on this sector. Petrol and diesel are required to run factory machinery and unavailability of input tax credit on petroleum products will most probably push up the final price of all manufactured goods.
Conclusion of GST’s effect on taxation in India
Once GST is implemented, India will become a single market where goods would be able to move freely and there will lesser compliances to deal with.